Barring a further credit easing by the Federal Reserve, major banks are not expected to reduce their prime lending rates anytime soon, despite Wednesday's quarter-point cuts by two lenders.
Tiny Southwest Bank, St. Louis, and midsize Central Fidelity Bank, Richmond, Va., cut their prime rates to 5.75% from 6%, which has been the prevailing rate in the industry for more than a year.
"I think it will be an isolated situation, unless the discount rate is cut by 50 basis points, based on unusually weak economic numbers in the future," said Sung Won Sohn, chief economist at Norwest Corp., Minneapolis.
A cut in the discount rate, which the Fed charges for borrowingly by member banks, would likely coincide with a cut in the federal funds rate, which banks charge each other on overnight loans.
The discount rate and the Fed's targeted rate for federal funds have remained at 3% for a year.
Spring Inflation Fears
After a brief inflation scare last spring, the central bank's policymaking Federal Open Market Committee decided in May to tilt toward higher short-term rates.
But many economists now believe the Fed has shifted back to a neutral stance, given the economic recovery's continued sluggishness and recent reports that inflation is under control.
Jeff Thredgold, chief economist at Albany, N.Y.-based Keycorp, said he expects short-term rates to remain unchanged at least through the first quarter of 1994.
Absent a further drop in short-term rates, economists think banks would be reluctant to cut the prime rate.
Concern for Margins
"Banks are going to do everything they can to protect their margins," said Mr. Sohn of Norwest.
For the past few years, banks have maintained an unusually wide spread between the prime rate and their own cost of funds as a way to enhance profits and rebuild capital.
Moreover, little evidence suggests that a lower prime rate would spur greater borrowing by businesses and consumers, thus boosting economic growth.
Of all the reasons for the lack of loan demand, "the one thing you don't hear much, if anything, about is the prime rate," said Irwin Kellner, chief economist at Chemical Banking Corp., New York.
Loan pricing is really secondary to the lack of corporate and consumer confidence, said Mr. Thredgold at Keycorp.
Gary Ciminero, chief economist at Fleet Financial Group, said banks could be prodded into cutting their prime rates by jawboning from the Clinton administration.
So far, though, that hasn't happened, and Mr. Ciminero said such a tactic would be "wrongheaded."
